Business Survival Skills

In the wake of the extraordinarily destructive 2005 Gulf Coast hurricane season (roughly from June to November), U.S. businesses are now more aware of the wide variety of perils they may be exposed to on a daily basis. These risks can be related to economic, technological, political, or even biological forces. Some such risks may be controllable, while others are not. Consider the impact that events as unrelated as a global epidemic, a spike in exchange rates, a war, labor strikes, a computer virus, crime waves, or an earthquake could have on any given business or industry. Not only does the possibility of such perils impact companies directly, but the increased speed of economic activity and response to such events also make ever more relevant the risks borne by business partners and strategic allies.

The proliferation and variety of worldwide digital media in use has changed the definition of a “local disaster,” if there truly is such a phenomenon.[1] As managers witness the unexpected, they become more aware of the extent of their vulnerability to factors outside their control. Awareness is a good thing, as long as it does not lead to overreaction or paralysis in decision making. We know that potential disasters receive far more attention after they occur even though the probability that the event will happen again is relatively remote.[2]

In a business setting, it is key for an organization to prepare and plan for any of a number of foreseeable unexpected events that the organization may face. Three important steps of the preparedness process include assessing potential risks (see table at the end of this article), developing survival mechanisms and responding quickly to a given disaster.

Some estimates suggest that 80 percent of companies worldwide are not well prepared in the event of a pandemic type of an event or a natural disaster.[3] Businesses can learn lessons from those who have proven their abilities to prepare for and respond to events out of their control. This article draws on wisdom from Gulf Coast survivors, businesses and individuals alike. Their foresight and insight provide a framework that can be used to better prepare for the unknown. Below are some suggestions that correlate the homeowner’s preparedness to preparing businesses for surviving disasters.

Developing Survival Mechanisms

Board up windows [Secure adequate insurance]. Managers can learn from homeowners who build an effective first line of defense. Many coastal families have perfected the ability to board up their windows at a moment’s notice. Knowing the danger of hurricane force winds, they store a set of boards uniquely fitted to their windows. The purpose of this exercise is to shield against the possibility of broken glass and the vulnerabilities of a home or business exposed to the elements. Businesses should carefully consider the protection that they have in place, particularly insurance, to guard against such unforeseen circumstances.

Statistics reveal that 20 percent of businesses that close after a catastrophe never reopen.[4] Insurance is an absolute necessity for protecting a business from exposure to financial ruin. Business Interruption Insurance is particularly key. It can provide coverage for things such as renting a temporary location and paying employees during a shutdown. While property insurance covers the physical loss a company suffers as a result of an unforeseen event, business interruption insurance can cover a company for the financial loss of being out of business for an extended period of time. As with all insurance, policies should be examined carefully for the extent of coverage, and even more importantly, for exclusions.

Photo: Rodolfo Clix

Secure a water supply [Maintain, update inventories and lists of suppliers]. Business owners must consider how their daily operations are hydrated, and once again, they can learn from coastal residents. During the summer months in the Gulf Coast, one can often find a stockpile of empty containers such as milk cartons or empty 2-liter bottles stashed away in hurricane-ready homes. Although a homeowner plans to dispose of the containers at the conclusion of whatever “disaster season” is typical in a given area, if a natural disaster does pose a threat to the integrity of the water supply, such a container stockpile will be invaluable for storing as much fresh water as possible.

Just as individuals often assume that water will always be available at the turn of a faucet, it is also easy for businesses to take supplier and distribution networks for granted. As the trend toward just-in-time inventories continues to be more prevalent, any disruption in the replenishment pipeline could result in large costs to a business in lost sales and idle capacity. Small businesses may take an even harder hit if a single supplier, distributor, or customer is crucial to their continued existence. The analogy breaks down somewhat due to the fact that businesses often cannot “stock up” on these emergency relationships for future use. Nevertheless, it is important to know what alternatives exist and to be prepared to access them quickly. Accordingly, for many businesses it makes financial sense to maintain a diverse portfolio of suppliers. This is a way to reduce the power that suppliers may have over a company’s financial future.[5]

Plan for evacuation [Prepare a business continuity plan]. Gulf Coast residents know that when an approaching storm makes it absolutely necessary to leave town, it is crucial to have a plan of action that will enable employees to vacate intelligently and without delay. Seasoned evacuees know whom they are responsible for, where they are going, and what supplies are necessary to sustain them for a given period of time. They know how to secure their property and to make provisions for their eventual return in case of evacuation. Businesses must also seek ways to maintain calm among staff and customers in the face of disaster by having a sound disaster plan that is ready for execution. Such a plan is critical, regardless of how small or large the number of people and resources a company is responsible for protecting.

The plan should be communicated and updated regularly to ensure that it addresses each of the most important functions of the respective business. Employees should be aware of the appropriate actions to take and must know their individual responsibilities. It is equally important to be self-sustaining in circumstances that imperil valuables beyond the physical facilities of the company. The plan should basically do the following:

Identify the resources and information that are most important;

Specify how such information will be accessed;

Determine how communication will take place between the organization and its employees, customers, and key stakeholders after an evacuation takes place.

Any number of forces may cause the abandonment of business as usual, but a well thought-out plan will help business personnel escape with the resources necessary to insure the survival of the business until its normal routine can be resumed.[6]

Photo: Wanderlei Talib

Stock up on batteries [Maintain sustainable communication and power access]. Businesses may find themselves in great peril if they have not taken the necessary precautions to maintain sustainable access to communication and power. Months after the advent of Hurricane Katrina, an evening drive through some of the most popular neighborhoods in the city of New Orleans reveals streets that are eerily dark. While Hurricane Katrina was an extraordinarily destructive event, it is important to plan for the possibility of a complete infrastructure failure in which conveniences we have grown to rely on such as Internet, television, power and phone lines become unavailable, perhaps for an extended period of time. In order to sustain a basic level of information and safety, residents in disaster prone regions know that the simple presence of battery powered radios and flashlights can go a long way to calm fears in times of uncertainty.

This survival skill becomes particularly crucial when one considers the growing percentage of business processes that rely on communication-based transactions. The Internet can provide a safety net of sorts, since it is not location dependent, but data on servers is still vulnerable. Along with customer data, accounts receivable and payable data are especially valuable and should be backed up daily.

Given the high value that businesses now place on their data, data loss incidents can often result in bankruptcy.[7] In order to be prepared, it is necessary to have a full understanding of how critical data moves in and out of the organization and what options are available to sustain this flow. In addition to making an onsite back-up with an external hard drive or other media, more businesses are protecting their crucial processes by diversifying access to data and maintaining off-site records.[8] Any organization will benefit by determining alternative ways to continue operations in the absence of phone, power, transportation, database functionality, e-mail capabilities, or access to physical facilities.

Photo: Michael Anderson

Keep a full tank of gas [Plan for financial viability]. A business must prepare a financial reserve for use in a given disaster. Once again, an analogy can be made with hurricane victims. Television images captured the least prepared evacuees waiting in line for gasoline. For the prepared, fueling up is a priority when evacuation conditions become a possibility. Even if residents intend to weather the disaster at home, they should make a plan to have on hand an available supply of gasoline after the emergency stages of the disaster passes.

Businesses worldwide had to bear the financial burden of the Gulf Coast hurricanes manifested in increased energy and raw material costs, decreased retail sales, construction shortages, and decreased industrial production and foreign trade. In the aggregate, the impact of Hurricane Katrina reduced national economic growth in the second half of 2005 by between .5 and 1 percent.[9] It is important to have a financial and economic survival plan that will fund the running of a business even when unexpected costs arise. Having sufficient working capital and even developing a contingency plan to liquidate assets quickly, in addition to having some sort of “rainy day fund” can provide a business a “financial lifeboat” in times of trouble.

Don’t overreact to weather reports [Avoid mismanagement of risk]. Another way to state this survival skill: don’t buy a boat to park in the front yard or your business’ parking lot. Developing a set of survival skills is critical, but it is also important to realize the human tendency to mismanage risk.[10] Often in the aftermath of an unusual catastrophic event, the risk-awareness gauge can swing to the extreme. Too much attention to risk avoidance may cause more harm than it prevents. Some unintended consequences include unnecessary fear, irrational responses, overreacting to low risks, distraction from primary tasks, undue burden on resources, accumulating too much working capital, emotional biases in decision making ability, and too much dependence on risk-hedging instruments. An astute manager finds and maintains a healthy balance between conducting daily operations and preparing for unusual circumstances.

Prepare to respond quickly [Develop a quick disaster response plan]. Responding quickly is the final step in the process of surviving a disaster. Events in the United States over the past few years—perhaps starting with the 9/11 attacks—have stimulated a sharp rise in the national focus on contingency planning in contrast to the previous long period when the geo-political environment appeared to be calmer. Some countries have reacted by requiring risk assessments in financial statements, including detailed analyses of potential risks, potential costs and assigned responsibility.[11] A growing awareness now exists regarding the possibility of compounded impacts from multiple or layered disasters. It appears that prior to 9/11, many companies had shelved their contingency plans for too long and needed motivation for updating their disaster preparedness plans.

Home Depot’s response to Hurricane Katrina provides a good example of how a company’s disaster plan can help not only a company, but also the customers it serves. Home Depot was among the first businesses to reopen in the post-hurricane days. The company’s risk management plan had been determined well ahead of time and helped Home Depot to get the personnel, supplies, and infrastructure in place to service threatened stores before and after the hurricane hit. Four days before the storm arrived, procedures were underway to ensure that each store was adequately secured. While a regional center in Atlanta coordinated Home Depot’s efforts, electrical engineers and maintenance teams were ready to deploy teams to the affected areas as soon as the zone was open. The result was that 23 stores reopened the day following the storm, and all but four were operating within a week. This illustrates how a business that prepares well and responds quickly can recover from a bad situation.[12]

IBM serves as another example of a company that has planned well. On any given day, nearly 40 percent of IBM workers do not report to an IBM facility, and through a web-based collaborative environment that IBM has built, business activities may not miss a beat if everyone worked from home.[13] This forward thinking on the part of IBM could be contrasted with numerous companies that continue policies that prohibit telecommuting.

Conclusion

Businesses must develop plans that are feasible and that protect their most valuable assets. It is important to recognize that any disaster will be costly and that it can be difficult to allocate money in preparation for infrequent events. However, a cost-benefit analysis that takes into account the expected probability of an event will shed some light on the extent to which a company should prepare. Companies should consider location-specific risks and those that may affect key partnerships. Many disasters are foreseeable, and organizations can benefit from the collective wisdom of other organizations that have survived disasters.

Managers should be realistic about the costs of their emergency plans and ensure that finances, staffing and other resources will be available to enact the plan. Companies that follow these steps will be prepared to act in the midst of chaos and to help lead the community in recovery. It is important to remember that a catastrophe by its very nature is unexpected and to realize that it can also be overwhelming. The best preparation for a cataclysmic event is to develop a disaster preparedness plan such as that we have outlined. Remember to include in it a commitment to lending your fellow human beings a helping hand. Some disasters are too big to handle alone.

David M. Smith, PhD, is associate professor of economics at the Graziadio School of Business and Management at Pepperdine University. His economic expertise includes the areas of labor pay and productivity, forecasting, and analysis of specific labor markets. A labor economist with an applied focus, Dr. Smith has published numerous articles that have appeared in both academic and practitioner journals. In addition, he has a chapter in an edited volume, a monograph, and published book reviews to his credit. His research on credit unions research has been used in arguments before the US Supreme Court as well as in state legislative hearings. Dr. Smith closely follows current economic trends and has appeared on radio and television and in several newspapers and magazines, including most recently the London Times, the Los Angeles Times, USA Today, the New York Times, and the Investor’s Business Daily.

Jaime Michaelson, MBA, a full-time MBA student in Pepperdine’s Graziadio School, graduates in August 2006. Prior to graduate school, she worked as an inventory analyst for Russell Stover Candies. She earned her B.A. in Management Information Systems from Point Loma Nazarene University. Upon graduation, she will join Paramount Farms as the P&L Analyst for their Pistachio Division.